Document View

Only industry veterans can recall when Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans were primary products for most mortgage bankers. VA home loan guarantees dropped from 455,616 in 1987 to 133,237 in 2007, according to the VA. However, private mortgage insurance certificates swelled almost fourfold over that period. Surging FHA loan production is stepping in to replace the battered subprime arena. Higher loan limits for FHA deals are adding to the attractiveness of that business. Higher loan limits for Fannie Mae, Freddie Mac and FHA were a centerpiece of this year's economic-stimulus plan. However, critics note that loan limits on mortgages backed by the VA stayed at $417,000.

Only industry veterans can recall when Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans were primary products for most mortgage bankers. FHA granted 1.3 million endorsements in 1987, notes the Department of Housing and Urban Development (HUD). Despite an expansion of the overall home mortgage business over the next 20 years, FHA endorsements still fell by 56 percent during those two decades.

VA home loan guarantees dropped from 455,616 in 1987 to 133,237 in 2007, according to the Department of Veterans Affairs. However, private mortgage insurance certificates swelled almost fourfold over that period, adds the Mortgage Insurance Companies of America (MICA), Washington, D.C.

But that trend now is reversing. Current Ginnie Mae production doesn't suggest the industry is in a slump. Ginnie Mae issued $39 billion in securities during the first quarter of this year, with almost $15 billion coming out in March alone, the agency reports. FHA and VA loans made up most of those pools. By comparison, Ginnie had just $18.3 billion in volume over the first three months of 2007.

Growth at Ginnie has accelerated as the subprime business has deteriorated. "Ginnie Mae has seen a steady increase in our issuance since October of last year," says Theodore B. Foster, Ginnie Mae's senior vice president for mortgage-backed securities (MBS).

In 2005, Ginnie Mae accounted for just 4 percent of total MBS issuance. However, today FHA and VA market share is jumping, Foster adds.

"Our issuers have indicated that as much as 30 [percent] or 40 percent of their business may be securitized through Ginnie Mae this year," he explains. "We expect Ginnie Mae to issue between $175 [billion] and $200 billion in MBS in calendar-year 2008."

Rising delinquencies on both subprime and conventional loans are encouraging mortgage companies to move back into government-insured mortgages. Private-label securities, backed primarily by subprime loans, made up 57 percent of total MBS dollar volume just two years ago, reports Ginnie Mae. But private-label securitization has shrunk to just 7 percent of the MBS market since reaching that peak, according to Ginnie Mae.

Surging FHA loan production is stepping in to replace the battered subprime arena. Higher loan limits for FHA deals are adding to the attractiveness of that business. In March, FHA loan limits were increased temporarily to $729,750 in some areas of the country. Higher loan limits allow FHA mortgages to be originated in real estate markets that previously were off-limits.

Many homeowners with adjustable-rate subprime loans also want to refinance today, and FHA's more flexible credit-history requirements make it a prime alternative for those consumers. Bill Glavin, a special assistant to FHA Commissioner Brian Montgomery, told Forbes that FHA is "inundated" with requests from lenders who want agency certification. He adds that FHA fiscal year 2008 loan volume is forecast to rise 168 percent over 2007 results.

Forgotten vets

Higher loan limits for Fannie Mae, Freddie Mac and FHA were a centerpiece of this year's economic-stimulus plan. However, critics note that loan limits on mortgages backed by the VA stayed at $417,000. Congress was trying to finalize the American Housing Rescue and Foreclosure Prevention Act in May. Its provisions include bringing the VA loan limit up to $729,750.

Yet Ginnie Mae pools currently will accept VA loans above $417,000 if the veteran provides a 25 percent down payment on the amount exceeding the limit. For instance, the VA will guarantee a $600,000 mortgage when a $45,750 down payment is present. A veteran in that situation needs less than an 8 percent down payment on the total loan amount.

In April, VA loan rates on a 3o-year mortgage were about 1 percent lower than what's available on conventional home loans, says Bruce Reichstein, president of VALoans.com, which originates nationally from its Houston headquarters. Reichstein notes that jumbo VA mortgages make up less than 10 percent of his total business. But they're helpful for retired officers and other eligible veterans who can supply a down payment.

Texas, California and Florida have the highest percentage of veterans, adds Reichstein. Being Sunbelt states, they also are havens for retirees looking to purchase more-expensive homes.

Although credit scoring isn't a required part of the loan process, VA lenders generally expect borrowers to have a FICO® score of at least 580, Reichstein explains. But the VA nevertheless can be an adaptable program. VALoans.com plans to debut a VA construction loan with a single closing within a few months.

Reichstein encourages veterans to consider other loan programs before applying. Not requiring a down payment or monthly mortgage insurance premiums are special benefits available through the VA. But a manually underwritten FHA loan is better-suited for borrowers with FICO scores in the 550 to 580 range, and consumers with 20 percent down payments usually come out ahead with a conventional mortgage, he notes.

Offering a variety of lending products helps originators seeking to maximize their business. Being able to originate government-insured mortgages provides particular benefits for originators in our current challenging market.